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Not long before the end

The U.S. as a whole will almost certainly face [California's structural deficit] problem before the end of Barack Obamaâ€™s administration in 2012. Social Security obligations were due to exceed collections in 2013; even before Obama quadrupled the federal deficit this meant a giant blazing meteorite was already hurtling straight at the heart of the Fedsâ€™ dinosaurian finances.

It turns out the end is coming even sooner than I thought. The Congressional Budget Office now says Social Security will start running a deficit in 2010. And there is no money in Social Security’s so-called “trust fund” just bonds issued by the Federal Government itself. This means that in 2010, the Obama administration is going to face tough choices. It can (a) cut SS benefits, (b) raise taxes, or (c) kick the can down the road by borrowing more money to keep paying them.

I think we can rule out cutting SS benefits; given that even Republicans couldn’t muster the political will for that when they were in power, it’s certainly not going to happen under an administration as ideologically wedded to redistributionism as Obama’s is. I have no doubt that Obama’s preferred solution would be to raise taxes – but this choice runs headlong into two serious problems. The more obvious one is that raising taxes during a recession will prolong the recession by suppressing employment and investment, handing the 2010 midterms to the Republicans.

The less obvious one is that raising taxes might not raise revenues even if it could be sold politically. There are several reasons to suspect this, one of which is the extremely skewed distribution of who pays taxes. Turns out that, as in California, the Federal budget has become disproportionately dependent on soaking the rich; taxpayers below median income supply only 3% of federal revenues, and the top 1% supply a whopping 38%. Soak-the-rich taxation is winning politics in a democracy because it means over 50% of the population gets to vote that the cost of government will be mostly paid by somebody else, but recent events in California demonstrate with brutal force how vulnerable this policy is to economic downturns. California’s tax revenues have crashed, and Federal tax revenues are headed in the same direction. Tinkering with rates won’t address this problem, and may well make it worse.

This leaves borrowing money – and that well has nearly run dry. There are already whispers that the soundness rating of U.S. Treasury bonds may be downgraded from AAA, and government borrowing is now so obviously unsustainable that it has triggered a populist insurgency of a kind never before seen in the U.S.

At some point, the U.S. government is going to lose both the ability to increase revenues and the ability to sell bonds. At that point the entitlements system will crash. Transfer checks will either stop issuing or become meaningless because the government has, like some banana republic, hyperinflated the currency in order to get out from under its debt obligations.

I’m now evaluating over a 50% chance that this point will be reached before the end of the first Obama administration in 2012.

People tend not to mention it for a variety of reasons, but I think it should be mentioned, and those reasons should be flushed out into the open.

For one thing, it isn’t just the best choice, it’s actually the only choice. The question isn’t whether we will fail to meet our “commitments”. The question is, will we cut people off from their “committed” money with a crashing economy, or without it?

What I find annoying is that we still are richer now than we’ve ever been. What’s killing us isn’t wealth, it’s overcommitting. Start aggressively raising the SS age, scale back entitlements the hard way, give up on “nationalized health care”, and just generally make hard cuts across the board, and truthfully it would all work out. I know it’s unthinkable to cut that deep, but in the end, it is even more unthinkable not to.

Sorry, you do mention that and I meant to acknowledge that; I mean to say it needs to be brought up more often and explicitly. My main point is that ultimately, all the discussion is just window-dressing on exactly how we’ll cut benefits.

They will almost certainly cut benefits in some capacity, most likely by raising the retirement age. Not sure how high they’d have to raise it to make ends meet. The other way to cut benefits is to lie on the COLA adjustments, in effect inflating away the debt. You sort of allude to this in the end.

It’s interesting to note what Brazil has done. They have a very similar problem that stems from government employee pensions. They refuse to cut benefits, and so they inflate the currency to pay for them, and then sop up the excess money with double digit interest rates from the central banks. Stagnates the economy, but it works.

Naturally, they will choose to hide and inflate, because it punishes the prudent people who have saved. And as far as I can tell, every policy is based on what will screw over the prudent and responsible the most.

@Eddy: If each person over his lifetime creates more liabilities than assets, then multiplying people will only compound the problem, whether or not you can make arbitrary births or immigration look like it’s good in the short run.

The problem is that collective debt financing indeed transforms people into liabilities to future victims of the system. Which then serves as a pretense to impose increased control on how previously free citizens.

1- “Take this money for free!”
2- “Actually, you have to pay for it as a taxpayer, and obey as a beneficiary.”

Reissue all Social Security cards in plastic with an expiration date… the date of retirement!
Political quote, Social Security… too big to fail!…
—
And yes, I think you are spot on, as this will be a Rubicon issue for the U.S.

@esr If the system were in a temporary debt and kids/immigrants as such were magically creating assets, then having them now would provide a basis on which to borrow a way out of the current debt, even without having to wait for them to be old. The problem is that this is not temporary debt but deficit spending, a Ponzi scheme and that adding players to the scheme only makes it worse.

Yawn. Just ignore the reality of Congress creating and passing the legislation you’re alluding to (which hasn’t actually nationalized anything, in truth, although it is illegal)…and further ignore the almost exclusive Democrat support for said legislation (including your blathering wunderkind Obama). Ignore it all. Blame Bush. Fantasy is so much more comfortable than reality.

I think crash and burn by 2012 is wildly pessimistic. Generally, rapidly accelerating inflations and/or defaults require that the country have substantial debt in other currencies, not its own. Otherwise, there are some negative feedback loops that significantly slow the descent into chaos. For example, the economy will suffer as this plays out reducing demand for money from the private sector so that money can be used to finance government debt.

I’d be more worried if long bonds priced in any problematic future inflation, but they don’t.

“Itâ€™s interesting to note what Brazil has done. They have a very similar problem that stems from government employee pensions. They refuse to cut benefits, and so they inflate the currency to pay for them, and then sop up the excess money with double digit interest rates from the central banks.”

Yes, that was Keynes’ first idea around the Great Depression, very different from his later-day General Theory that turned into Keynesianism: basically this first idea was that the GD was caused by unrealistically high wages, but unions won’t allow reducing them, therefore the only possible thing to do is to inflate wages away and hope the unions won’t notice that actually it’s pay cut in real wages. This actually IMHO made somewhat more sense than the later General Theory which went into a very different direction.

“They refuse to cut benefits, and so they inflate the currency to pay for them, and then sop up the excess money with double digit interest rates from the central banks.”

What… how? How is it possible to inflate the currency without low digit interest rates? Inflating the currency = commercial banks borrow more money from the central bank, which they only do if the interest rates are low.

But if it’s possible, then that looks like a very unusual phenomenon: on one hand, the excess currency is supposed to cause a malinvestment boom (a bubble), on the other hand, high interest rates actually hold back investments. I’m not sure what this combo would cause in the longer run.

Dan: wow. Where on earth did you get the assumption that I’m a supporter of said “blathering wunderkind”?

ESR incorrectly states that it was Obama who quadrupled the budget deficit. ESR further asserts that Obama’s administration is “ideologically wedded to redistributionism” partly based on the assumption that Obama directed the bailout. However it was under the direction of the Bush administration that Congress bailed out the banks, along with crucial support of the Democrats in Congress. Both parties vehemently supported the bailout, a convenient fact you exclusively ignore. I don’t quite understand how saying both parties supported the bailout makes me a Obama supporter in your mind.

You assert Congress created the legislation. While technically that is true, the reality is that Paulsonâ€”a man who established his career on ultra-orthodox laissez-faire economic policies [1]â€”presented the bailout plan to Congress. Congress then passed it in an emergency joint session. Other notable libertarian Republicans strongly supported the bailout, like Greenspan [2].

You say Congress did not nationalize the banking system, which is technically true. The government just happen to buy majority stakeholder ownership in the failed banks. They didn’t assert control over the banks.

>ESR incorrectly states that it was Obama who quadrupled the budget deficit.

No, I stated this correctly. The cost of TARP – which the rescued banks are obligated to repay, and which some have already repaid because they want out from under the associated regulatory burdens – was chump change compared to the useless “stimulus” bill.

The entire notion that “someone else” will pay the taxes is disingenuous. How is it that high-income earners earn those high incomes in the first place? By providing goods/services to people. If you don’t think those people will raise the prices they charge, passing those taxes along to the consumers, you are kidding yourself.

The best example of this mentality is the “employer matching share” of SS/Medicare “contributions”. If Congress declared tomorrow that employees would nominally pay the full load (just as self-employed people do now), their gross pay would go up by the amount the employer now “pays”, leaving things pretty much the way they are now. Your employer doesn’t really care whether he puts that money in your paycheck or sends it to Uncle, either way it is the cost of your services. The difference between what he pays and what matters, not the difference between your nominal gross pay and actual net.

Plato: The null hypothesis is that the stimulus bill is useless. The correct question is, how can you prove it has done anything other than spend several hundred billion dollars?

It should be pointed out that even if you accept the Keynesian theory that calls for the stimulus bill (which I don’t, but it doesn’t matter), by that very theory, the stimulus bill is useless; it has almost nothing of a stimulative nature in it. So it really does fall to you to explain why a bill that doesn’t even resemble a “stimulus” was anything other than a several-hundred-billion dollar expenditure of Obama’s political capital. (Which, in hindsight, turned out to be most of it, with the rest of it spent on getting Cap and Trade past the House, but not the Senate. Oops.)

If the stimulus bill doesn’t do very much economic stimulation, then:
a) Where did all that money go?
b) Why did the administration choose to give away the money in that manner if they were spending tremendous political capital on it?
c) Most importantly, what actions would be considered economically stimulative under Keynesian economics (which people like Geithner and Emmanuel oppose)?

The answers to A and C are readily available on the web, Plato, and my summarizing them in a comment is not something I see as desirable from any point of view. (B has some judgment involved and can wait until A and C are established.) Are you genuinely curious? And have you considered Googling and posting the links here? I know enough to satisfy myself and haven’t got the time to do it right now.

One warning, though: “Keynesian theory” took a beating as politics and (mostly ignorant) pundits began hammering it into “an excuse for the government to be unrestrained in spending”. Look for a description of Keynesian stimulus that’s more than a couple of years old, then compare to the actual spending in the bill.

As hollow as our Ponzi scheme is, it is (or was) one of the best funded in the Western world.

Should be interesting times coming down the line. In the Chinese sense.

At some point (and I think it’s 2013 to 2014), debt services are going to completely dwarf discretionary spending. And that, my friend, is going to be a fascinating Congressional budget debate.

Stock up on popcorn, and get your buddies together to watch C-SPAN. Make a drinking game out of every bald-faced lie you see proposed. Throw another steak on the grill every time you see a buck being passed.

Plato:
>If the stimulus bill doesnâ€™t do very much economic stimulation…

Of course pouring hundreds of billions of dollars into projects has some stimulative effect. However, to say that is to talk like a politician, which is to say, it ignores the broader context. Here are the facts:

1. Despite the alleged hurry up, almost none of the money has actually been spent. (Rather it sits in a war chest to buy votes in 2010 and 2012)

2. More importantly, the question is not does money stimulate the economy, but rather, if that same money (or in this case debt) had been spent elsewhere, would it have stimulated the economy more?

Point two relates to the classic example of bad economics. If I throw a rock through your window I stimulate a part of the economy. A new window is purchased, someone has to transport the new window, someone has to install the window, someone has to clean up the mess, the police have to investigate. Look at all the jobs and wealth this has generated. Why is breaking windows not a good solution to economic crisis (or, as JMK suggested, digging holes and filling them in?) If you are not sure of the answer, look up “opportunity cost” in an economics textbook.

There are many ways in which this debt could have been used much more productively. For example, if, as Limbaugh suggested, they had suspended the income tax for 2009, we would have seen massive stimulation of the economy. But the stimulus package is about using money for political ends, and the stimulation of the economy, while certainly a consequence, is not the primary goal. It is about using the crisis to do things that you otherwise wouldn’t be able to do politically, to paraphrase our current White House Chief of staff.

In regards to social security: we are told that the problem is changing demographics, we are told the problem is people living longer, we are told it is the baby boom. However, the truth about social security is much simpler. We can’t pay the obligations because the government spent the money instead of saving it. It is as simple as that. Life insurance companies are not going out of business, despite being subject to the same pressures. Why? Because they didn’t steal the money. It really isn’t very complicated.

What will happen? In truth what will happen is that the government will decrease benefits, however, they will do in indirectly, not by changing the dollar number on the social security check, but rather, by devaluing the dollar, and making that check worth less. This is why many of the scenarios of hyperinflation are wrong. Hyperinflation is caused when a government inflates the currency to pay obligations that are not denominated in that same currency. For example, in the 1920s, Germany was obliged to pay war reparations in gold, denominated in gold. That means that when they printed more money to pay them, they decreased the gold to mark conversion rate, meaning that they had to print more, which further devalued it, and so forth, leading to the typical exponential behavior called hyperinflation.

When the obligation is denominated in the currency, that effect cancels out, (since as you devalue the dollar, you also devalue the obligation itself.) However, there is a trap in this too. As you devalue the dollar, you also devalue your tax revenues. If a dollar is worth 10% less, then the actual value of your tax revenues (assuming the number of dollars doesn’t change) also devalues 10%. This is a real problem. Since the number of dollars also goes down (due to the constriction of the economy) you are headed on a bad path.

When President Obama took office on January 20, 2009, the federal debt stood at $10.626 trillion. As of September 10, 2009, the debt was at $11,784, about $1.15 trillion or about 10% higher than when he took office. People continue to say that President Obama has â€œdoubled the deficit in one year, quadrupled the debtâ€. What they are alluding to, but not making this clear, is the increase in the annual federal deficit, which can be compiled by finding the start and finish numbers between October 1 and September 30 (which is the federal fiscal year). The last year of George W. Bush finds the annual deficit to be about $1.17 trillion. That year ended on September 30, 2008. By January 20, 2009, when Barack Obama took office, the total U.S. federal debt has risen another $500 billion, from about $10.124 to about $10,625 trillion; thus, President Obama entered fiscal year 2008/2009, mid-way, already $500 billion into the annual federal deficit.
Statements that President Obama has â€œdoubled the (annual) deficitâ€ are lies. They are simply not true. And any statements that imply that Obama has significantly increased the total federal debt are also untrue. In fact, the biggest contributors to the total federal debt would be President Ronald Reagan, who doubled the debt during his eight years in office, from about $1.6 trillion to over $3.0 trillion, and George W. Bush, who nearly doubled the debt, raising it from about $5.5 trillion to $10.625 trillion over his eight years.

If the government reneges on the federal bonds held by Social Security then things go downhill quickly. I expect the Social Security Administrators will go into a closed room with the Federal Reserve, and they will emerge with some kind of deal about redeeming the government bonds for less than face value.

But that just means there’s less money available for benefits. Cutting benefits isn’t all that hard if you get creative enough. Bill Clinton declared he wouldn’t cut benefits, but then he decided that tehy were subject to income tax. So you benefit check gets smaller, and the government keeps the rest. That’s a cut by any definition.

that would be fine (extreme, but fine). Lets pay-out the existing SS recipients and admit nobody (new) to the program. As the recipients die-off, reduce FICA (both employee and employer contributions) contributions to match.

So your proposal is to tax poor young people to subsidize rich old people? (This being the typical distribution of wealth in the USA.)

Here is a better proposal: convert the hidden obligation into real debt instruments, and give everyone some sort of private annuity instrument to represent their contributions to FICA. Then sell off the massive assets of the Federal government to finance these instruments.

How would that work? Here is one way.

Distribute the holdings of the federal government into 366 packets, randomly and blindly. One packet is designed to have about one quarter of the assets (for February 29th.) Create 366 corporations and fund them with these assets. Publish a detailed list of what asset belongs to which corporation. Distribute the shares of these corporations to people based on their birthday (Jan 1 babies get shares in corporation 1, Jan 2 babies get shares in corporation 2 etc.) You get one thousand shares for each year you have contributed to social security, and loose one thousand for each year you have drawn out of social security. Float the corporations on the public markets.

When you get your share certificates in the mail, you also go a pamphlet explaining how to sell your shares and convert it into a private annuity. Put on a public advertising campaign to explain to people how to assess the creditworthiness of annuity providers and how the whole scheme can be used to fund your retirement.

The day the companies are floated, all social security payments stop.

What assets you ask? There are so many it is hard to count. Massive amounts of land, mineral rights, buildings, patents, good grief, how much money would selling off the public airwaves make? It is hard to assess how much all that stuff is worth, but it would be a lot.

Social security goes away. People don’t die in the streets. The government gets rid of all the unconstitutional crap they shouldn’t have anyway. All these assets are brought back into the private sector and consequently are made to run more efficiently for the benefit of society as a whole. Win, win, win. Except if you are a narcissistic, controlling, megalomaniac politician.

Unfortunately, since such a scheme would have to be enacted by narcissistic, controlling, megalomaniac politicians, it is unlikely to go anywhere beyond this blog. Ah well.

First (implied question): why wouldn’t the stimulus bill do much economic stimulation? Answer: because the money is being spent on the wrong things. For all the talk about funding “shovel ready” projects, most of the money wasn’t scheduled to be spent for something like five years. And even then, it wasn’t going to be spent on the kinds of projects that would stimulate anything. A good portion of money for road construction projects will go into environmental impact reports, added costs for redirecting traffic while portions of a road are torn out, attempts to reduce pollution at the asphalt plant, etc.

Imagine I have the blueprints for a bridge already drawn up and I have all needed paperwork finished in order to begin work. I believe this counts as “shovel ready.” So I get $1 billion. And then I go through my state’s RFP process ( http://en.wikipedia.org/wiki/Request_for_proposal ), pick a “this is how to turn those blueprints into a bridge” plan from the response, have firms actually bid on implementing that plan. pick a firm, go through nitty-gritty contract negotiations with that firm, get the state Department of Transportation to come up with plans to redirect traffic, etc. Do you see how this can drag on?

> If the stimulus bill doesnâ€™t do very much economic stimulation, then:
> a) Where did all that money go?

There are two answers to this. The first is that most of the money hasn’t been spent ( http://www.recovery.gov/?q=content/report-progress shows that $237 billion of the $800 billion has been approved for spending, but only $98 billion has actually been spent). But the promise to spend that money counts against the deficit because it has to be budgeted for. The second answer is “things like Cash for Clunkers,
lots-o-strings-attached payments to state governments (the strings being promises by those state governments to spend more of their own money in the future), and the NEA.”

> b) Why did the administration choose to give away the money in that manner if they were spending tremendous political capital on it?

They miscalculated the results. They didn’t realize until it was too late that they had pinned their hopes on the wrong horse.

> c) Most importantly, what actions would be considered economically stimulative under Keynesian economics (which people like Geithner and Emmanuel oppose)?

The idea of Keynesian economics is that money is taken out of the economy because it isn’t being used, and then spent on things that have a big multiplier effect. So there are two questions here: (1) how do you find money that isn’t being used, and (2) what do you spend it on? If people were hoarding money — like in Great Britain in 1981 — then you’ve found money that isn’t doing anything and can be taxed without hurting the economy. But nobody was hoarding money in February. But assuming we’ve found some money just lying around, we need to get it into the right hands as quickly as possible. Infrastructure projects aren’t very good for that. Hiring more teachers isn’t bad — assuming you have the classroom space. Upgrading computer systems around the country (local, state and federal governments) would have had a faster turnaround time than building bridges, dams and roads.

> Now, riddle me this: What happens when 60% of the population earns 40% of the total income? … Do the math, esrâ€™s statistics are broken.

This is referring to Raymond’s statement that “over 50% of the population gets to vote that the cost of government will be mostly paid by somebody else.” Raymond is correct; and it doesn’t matter how the money is distributed. US elections are “one person, one vote,” so you need just over 50% of the population to do the voting — regardless of what their income is.

If 60% of the population earns 40% of the income, then 60% of the population can have the other 40% of the population pay for services (the other 40% earns 60% of the income, after all). There really isn’t any way to distribute income that makes Raymond’s statistics wrong. If everybody makes exactly the same income, then 50% + 1 “low income” voters can push the tax burden on roughly 50% -1 “high income” voters. Once you have any difference in income, then the high income voters will earn more of the pie than the low income voters by definition. So 50% + 1 low income voters can then draw on the resources of the 50% – 1 high income voters.

JessicaBoxer Says:
> Create 366 corporations and fund them with these assets. Publish a detailed list of what asset belongs to which corporation. Distribute the shares of these corporations to people based on their birthday (Jan 1 babies get shares in corporation 1, Jan 2 babies get shares in corporation 2 etc.)

Hmm, the birthdays of the population are not distributed evenly around the year. Lots of people would be cursing their parents for conceiving on the same day as everyone else…

Justin Andrusk Says:
> Hey maybe Obama will set the age where you can collect SS to 175.

I read somewhere that when SS was first enacted, the age where you were eligible was higher than life expectancy (at birth) at the time. Maybe Obama could be only somewhat less reasonable and go for, say, 95.

Aside from Mike’s minor point, which makes a nit pick look like a major issue, I agree it is politically unworkable.

> So next best thing: kill it off by stopping candidacy.

But your idea is politically workable? Tax the poor to support the rich. Take away dad’s pension, just as he is about to retire. Make me pay in and never expect to see a dime back. Yup, that should work really well.

No significant change is politically possible for Social Security. It will undoubtedly have to collapse in a horrible heap before anything can be changed, and that will be a very painful transition.

I was thinking some more about devaluing the currency as it applies to taxation revenues. What is interesting about the federal budget is that most of it is transfer payments of one kind or another. That is the federal government doesn’t buy things of value, but rather passes money to people who then buy things of value.

Until recently, the federal budget was roughly speaking split in three even parts: social security and medicare is part one; department of defense is part two; and the third part is split in two, half being interest payments on debt and the other half being miscellaneous stuff. That is probably different now with old drunken sailor in the White house. However, out of that only the miscellaneous portion and the defense budget actually require trading money for things of value. Everything else is a transfer payment. Consequently, when the currency is devalued, and tax revenues are devalued along with it, this only has an actual effect on about half the budget, that is to say, the federal government’s buying power is only actually reduced in that section of the budget. For the rest, the recipients of the government’s largesse are the ones who loose out.

Just an additional thought.

Oh, and let me apologize to drunken sailors, they might spend wantonly, but at least they only spend their own money.

Statements that President Obama has â€œdoubled the (annual) deficitâ€ are lies.

Narrowly true, but the only the word “has” is incorrect. It’s just a matter of time, because the argument is about the Obama administration’s own predictions, which show they will add about as much to the national debt in one year as Bush did in eight years, and in the years 2009-2019 the national debt will double. Linklinklink.

One person one vote applies to a Republic just as well (c.f. Gubernatorial elections, Mayoral elections, state legislative elections, federal Senatorial elections, federal Congressional elections). It doesn’t apply to corporate elections where each vote is proportional to investment. It applies to US Presidential elections (I don’t get multiple votes, after all) but the votes are counted differently.

> > You state, so you need just over 50% of the population to do the voting â€” regardless of what their income is.

> Wrong. Popular vote elections are won by the majority of voters, not the majority of the population.

Which means you need less than 50% of the population. Which still destroys your argument.

More formally, the Supreme Court has used the phrase “one person one vote” since at least 1963 (Gray v. Sanders), and used “one person one vote” with regards to a Presidential election in 1969 (Moore v. Ogilvie). The legal standard with regards to House districts includes “roughly equal populations” specifically because of one person one vote.

In other words, you may claim it’s a sloppy phrase, but I’ll continue using it.

Those who want to continue to economically grow (I am only 44!) versus decay, should understand the exponential function and thus the markets and strategy they need (I am trying this post into OPEN SOURCE in big way, let’s not forget this is Eric Raymond’s blog, the famous of author for Cathedral and Bazaar!!!), even imho Google needs to understand better the exponential function:

The term republic is a bit confusing because it can mean three different things.

It can mean, indeed, a state whose head is not a monarch.

It can mean a state based on the idea of “civic virtue”. (Starship Troopers?)

And it can mean a state where citizens have certain rights that are non-overridable by the rulers, be those rulers are monarch or the democratic majority. Only in this meaning makes sense to contrast the idea of a democracy with the idea of a republic, because this difference was observable already in in ancient Athens vs. Rome. In the Athenian democracy, the majority could simply vote to exile anybody whom they didn’t like, thus, non inalienable rights existed. In Rome citizens had certain rights that could not have been overriden by democratic power nor the magistrates nor the Senate etc. – in theory at least, as in practice this didn’t always work that way. But that was the idea.

In modern democratic republics – pretty much all modern developed states fall under this label – the two ideas are combined in the democratic power limited by constitutional rights that in theory can not or at least not easily overridden by democratic decision-making, this constitutional element is what makes them republics in the third meaning of the term.

Oh, and there is a fourth definition of a republic: representative democracy, instead of a direct one.

So it’s a little bit confusing but I think looking at it as democracy = the majority can do anything, democratic republic = the majority can do anything except violating constitutional rights is a useful way of looking at it.

# Jeff Read Says:
> Given that our previous President actually was a drunkard, this metaphor rings hollow for me.

You won’t hear me defend President Bush’s spending record at all, especially so toward the end — the price to the American people for President Bush to not be Hoover was quite amazingly high. However, the price for President Obama to be FDR is quite considerably higher.

Day says:
>So devaluation may not be a solution : it may allow to a social net, but it destroys investment and ultimately jobs and everything.

It is a solution to a political problem: how do you deal with a collapsing economy and still get re-elected. It is not a solution to the economic problem.
Devaluing the currency is a terrible thing to do. It is a massive hidden tax, it is stealing, it is a gross breach of trust, it is a very breach of the very meaning of money. But it is politically expedient. (Yup, lets give the guys who do that the power to decide what medical treatments we get, that is a good idea…)

>>Day says:
>>So devaluation may not be a solution : it may allow to a social net, but it destroys investment and ultimately jobs and everything.

>JessicaBoxer Says:
>It is a solution to a political problem: how do you deal with a collapsing economy and still get re-elected. It is not a solution to the economic >problem.
>Devaluing the currency is a terrible thing to do. It is a massive hidden tax, it is stealing, it is a gross breach of trust, it is a very breach of the >very meaning of money. But it is politically expedient. (Yup, lets give the guys who do that the power to decide what medical treatments we >get, that is a good ideaâ€¦)

You’re right. But knowing that, i think that Esr is way too optimistic when he writes :

In Timing the Entitlements Crash I wrote:
At some point, the U.S. government is going to lose both the ability to increase revenues and the ability to sell bonds. At that point the entitlements system will crash. Transfer checks will either stop issuing or become meaningless because the government has, like some banana republic, hyperinflated the currency in order to get out from under its debt obligations.
Iâ€™m now evaluating over a 50% chance that this point will be reached before the end of the first Obama administration in 2012.

The ability to sell bonds is already lost.
The ability to increase revenues is lost and won’t come back. It will be sure as soon as the $ is devalued. The boost of economy by way of devaluation of the dollar will be nothing compared to its fall due to the oil price increase. So as soon as the dollar is under 1.6$ for 1 â‚¬ (the previous low point of the dollar), international markets will react, and the dollar will freefall.

So, to know when all will be apparent, we just have to watch at which pace central banks are destocking dollar (between 50bn et 100bn a month for china, which had 2000bn at peak). So i guess end 2010 for the devaluation to have been aknowledged and the us interior political situation to be very difficult.
(2011 could be riots or even civil war, but that is a totally different investigation field.)

Social Security was created to be poverty insurance, correct? It is funded by FICA, whose I stands for Insurance, correct? The Wikipedia entry on SS shows seven components, four of them with the word Insurance in their name and the rest being equivalent to insurance. Therefore, it is probably high time it started being treated as an insurance instead of treating it as a pension fund. Only those at poverty level receive benefits that lift them a certain percentage above poverty. Which ultimately, in my opinion, leads to either means testing or some kind of exponentially progressive tax on benefits (ugh!). What’s supposed to happen is people put money away in savings and investments and there is no need for the US taxpayer to be supplementing retirement income if one has accumulated enough property and currency. Actually, implementing means testing probably would result in a pretty quick overflow of the so-called trust fund as benefits shrink. But it requires educating the population, kicking out this entitlement mentality that one puts into the system and then gets it back. The contribution is a tax and pays for current people. There is no account with your name on it anywhere.

The Japanese debt is at 200% of GDP, rising fast, and they still have plenty of headroom before the crash

There is a great deal of ruin in a nation. I expect signs of the end to start showing around 2020, but the final crash, in which the world stops using the dollar, will not happen till quite a while after that.

Another thing to consider about the U.S. govt’s fiscal mess is that the govt has some (limited, and tricky) power to subtly change the definition of money and to solve problems by fiat. I’d bet all the politicians who are smart enough to understand what’s coming also understand that the U.S. still has the biggest economy in the world and how much leverage that gives us.

Today no politician is brave enough to propose a bill cutting senior citizen benefits to a quarter or a tenth of today’s spending levels. But in a few years when all the news channels are screaming “The fed is are about to collapse! The sky is falling!”, then it will suddenly become politically feasible to cut out the sicknesses in our federal budget structure — eliminating whole entitlements programs if necessary — preserving the healthy sections of the economy, so that healing can begin for the healthy parts that remain. Or even more likely, we’ll hurt foreigners before Americans.

Shockingly oversimplified example: Imagine Congress being forced by events to vote on a choice between two unthinkable options: 1) Let millions of elderly Americans starve, or 2) Stop servicing all foreign debts, going into default on the majority of Treasury bonds.

Option 2 would pass unanimously!

And would destabilize the world economy, but while simultaneously solving the immediate problems facing the U.S. electorate and while preventing riots in the streets. What could the Chinese and our other big debtors do about it? Invade the Yankee mainland to collect their treasury bonds? And when the global economy collapsed for real… the biggest economy in the world would be in the best position to grab even more world power.

In fact, the ability to trigger that collapse at will is plausibly our government’s secret weapon against China ever becoming a true superpower.

@James A. Donald“The Japanese debt is at 200% of GDP, rising fast, and they still have plenty of headroom before the crash.”

Hmmm… Plenty of headroom ? Could you please explain ?

@Shawn“Option 2 would pass unanimously!”

Yep, but China is selling its bonds, and in one year, they won’t have any more bonds. So the secret weapon isn’t working anymore.
If US stops servicing foreign debts, there is no more foreign investment ; the dollar falls irredeemably ; there is no more import possible. There is no more us war possible. US kicked from afghanistan and irak. Think fall of USSR.

“Big job losses and a spike in early retirement claims from laid-off seniors will force Social Security to pay out more in benefits than it collects in taxes the next two years, the first time that’s happened since the 1980s.”

“The deficits – $10 billion in 2010 and $9 billion in 2011 – won’t affect payments to retirees because Social Security has accumulated surpluses from previous years totaling $2.5 trillion. But they will add to the overall federal deficit.”

Actually, thanks to the way SS is funded and accounted for, the day that SS starts running a deficit is not the day it becomes a problem. It became a problem the day that the difference between receipts and expenditures stopped growing, which happened a while back.

As long the difference between SS receipts and expenditures was growing, that difference was painless free money. When that difference started shrinking, govt had to find other sources of money.

The interesting question is whether the US govt defaults on external debt before it defaults on “internal debt”, like the bonds that the SS “trust” holds. The former is essential to keeping the charade afloat a little longer while the latter cause a revolt among the group most likely to vote.

@Jake Fischer: What kind of nonsense is “60% of the population earns 40% of the total income?” What is your definition of “total income?” Understand that economics is not a zero-sum game: there is no finite amount of money.

Here’s my solution to the SS crisis, which I came up with about 20 years ago: As of next 1-Jan, raise the retirement age 3 months. Next 1-Jan, raise it another 3 months. And keep raising it, 3 months per year, not until it reaches some preset limit, but forever.